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CBSA 0.22068095838587642%CBS Corp. Cl BU.S.: NYSEUSD63.58
0.140.22068095838587642%
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4137439AFTER HOURSUSD63.58
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17.80952380952381Market Cap
27290917564.5395
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1.1324315822585718% Rev. per Employee
888192More quote details and news »CBSAinYour ValueYour ChangeShort position
The fabled broadcast-TV network was No. 1 last year with viewers, clinching the honor for the seventh time in the past eight years. Credit goes to a string of hits, from NCIS, the No. 1 scripted series in the U.S., to Two and a Half Men, the most-watched sitcom, not to mention the ever-popular 60 Minutes, a TV stalwart now 43 years young.

The hit machine, along with a recovering economy, helped CBS (ticker: CBS) generate a 12% increase in advertising sales in 2010, reversing much of the prior year's 12% slide amid a historic recession. Spurred by the ad turnaround, earnings more than doubled, to $774 million, or $1.04 per diluted share, and are on track to rise another 65% or so this year, to $1.72 a share.

Such success hasn't been lost on CBS shareholders, who bid up the New York company's stock to a recent 25.88 from about 15 a year ago and 7 in June 2009. Shares got a 2% lift Friday after France's
JCDecauxDEC.FR 1.5984405458089668%JCDecaux S.A.France: ParisEUR26.06
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23.84263494967978Market Cap
5445591507.29379
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2.1488871834228704% Rev. per Employee
254035More quote details and news »DEC.FRinYour ValueYour ChangeShort position
(DEC.France), the world's largest outdoor-advertising company, said it is ready to bid for CBS's outdoor unit, even though CBS has said the business isn't for sale.

At 12 times next year's estimated earnings of $2.08 a share, CBS is far from expensive. Some analysts think the stock could rally to 32 in the next 12 months, implying a gain of 24% from Friday's close.

CBS CEO Leslie Moonves joined CBS's executive ranks in 1995, and has made the broadcast network No. 1 in the industry with a string of hit shows.
Matthew Furman for Barron's

Skeptics worry that a sluggish economy—or a second recession—could crimp CBS's advertising gains and earnings. But next year's presidential election will bring a barrage of ad spending irrespective of the economic backdrop, and Interpublic projected last week that television will capture 38% of total advertising spending in five years, up from an estimated 34% now.

As for 2011, CBS mopped up in the "upfront" market, leading the industry with commitments of $2.5 billion from advertisers who previewed the fall season in May. Prices were up an average of 13% to 15% compared with last year's upfront market. Advertisers typically lock in deals for spots in the fall schedule to avoid paying higher "scatter" prices that successful shows often command in the season. Scatter prices for CBS have risen 40% this year relative to last year's upfront prices.

ADVERTISING ACCOUNTS FOR 65% of CBS revenue, which totaled some $14 billion in 2010. Earnings growth increasingly could be driven, however, by new sources of revenue the company has begun to tap that will lessen the broadcaster's exposure to economic cycles. Starting from zero several years ago, CBS expects to garner $3 billion annually in the next few years from retransmission payments, which it receives from the big cable networks and satellite companies that carry its content; licensing of existing content to redistributors such as
NetflixNFLX -1.7146502910917936%Netflix Inc.U.S.: NasdaqUSD123.24
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333.0810810810811Market Cap
53810489910.495
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N/ARev. per Employee
2209850More quote details and news »NFLXinYour ValueYour ChangeShort position
(NFLX); the rapid growth of syndication in international markets, and reverse retransmission fees, a mouthful of a concept referring to fees paid by the company's local TV stations and nonaffiliates for carrying CBS programming.

We're No. 1

CBS is tops with viewers due to stellar programming. Investors also are impressed, and could send the stock higher in coming years.

Nomura analyst Michael Nathanson, who rates CBS stock a Buy, says various retransmission fees, along with the prospects for international syndication and distribution agreements, will make CBS "the biggest single beneficiary" among media companies of these trends. For example, CBS recently inked a $200 million, two-year deal with Netflix to redistribute just 7% of its library through the subscription-rental service.

It costs big bucks to produce quality programming, but CBS doesn't have to spend anything on these additional revenue streams. "Every dollar of retransmission drops right to the bottom line," said Leslie Moonves, the company's president and chief executive, at a recent interview in his office at Black Rock, CBS's imposing headquarters in midtown Manhattan. "They're 100 cents on the dollar."

Moonves, 61 years old, became CEO after CBS was spun off from
Viacom
(VIA/B) in 2005. Viacom founder Sumner Redstone, 88, retains voting control of the broadcaster through his investment vehicle, National Amusements, but hasn't taken an active role in operations in recent years.

CBS OPERATES IN FIVE business segments, led by CBS Entertainment, which chipped in 53% of last year's revenue and 37% of operating income. Run by Moonves' longtime associate Nina Tassler, the unit is home to the network, production studio, programming and syndication, among other operations. CBS's other segments include the lucrative cable networks and local broadcasting, as well as publishing—the company owns Simon & Schuster—and outdoor advertising.

CBS Chief Financial Officer Joe Ianniello expects advertising's share of revenue to decline in the next three to five years to 60% of the total, while recurring sources of revenue continue to grow. Content licensing and distribution currently chip in 21% of revenue, with affiliate and subscription fees contributing 12%. Such revenue "really diversifies the base, de-risks the business model and gives less volatility to earnings," Ianniello says. In time, such benefits could earn CBS stock a higher price/earnings ratio.

Money manager Waddell & Reed is one of CBS's biggest outside holders, with about 5% of the company's 625 million shares. The quality of management is part of the stock's appeal, says Aditya Kapoor, an analyst at the firm. "On the content and production side, they've done a fantastic job," he says, crediting Moonves with keeping the same management team for the past 20 years, and Ianniello with diminishing CBS's dependence on cyclical revenue while developing more recurring revenue.

Moonves is the consummate showman, forsaking a brief, early stint as an actor to run such vaunted production companies as Lorimar Television and Warner Brothers Television, which produced hits such as Friends and ER during his tenure. He joined CBS's executive ranks in 1995, bringing many colleagues with him. Moonves professes a fondness for watching sports during down-time (he is guardedly optimistic that the National Football League will "find a way to get started on time") when he's not perusing what the competition has on offer.

Kapoor considers CBS especially cheap based on the company's cash flow, which could reach about $3 a share in the next few years, compared with $1.96 in 2010. Like many media companies, CBS has substantial noncash charges for depreciation and amortization.

CBS HAS BEEN DISCIPLINED IN USING its cash to pay down debt, and also returns cash to shareholders. The company reduced its debt by $1 billion, to $6 billion, in the past year, and the board authorized a $1.5 billion share-repurchase program for the next 18 months. CBS pays a quarterly dividend of 10 cents a share, which it doubled after reporting strong first-quarter earnings. The stock yields 1.5%, more than both News Corp. and Disney.

The Bottom Line

A recovery in advertising helped CBS rally to around 26 from the mid-single digits in 2009. Continued ad-sales gains, plus fresh sources of revenue, could propel earnings and lift the stock to 32.

Traditional broadcast networks once viewed newer technologies such as digital streaming as a mortal threat. That is hardly true any more, however, as new media have become critical to building viewership and boosting advertising. At CBS, digital transmission and social networking have become fast-growing components of sales, adding new distribution and marketing outlets for existing content. "Social networking breaks down the fourth wall between audience and character," says Tassler, noting the audience feels "like they are part of the heart and soul of a show."

CBS produces about two-thirds of its content in-house, which will enable the company to exploit new media as well as new revenue models. "Whether we look at the incremental dollar being generated in the traditional model (retransmission fees) or in the broadband video world (Netflix payments to CBS, Fox, ABC and NBC), broadcast-TV content is taking a greater share of the pie," Morgan Stanley analyst Benjamin Swinburne wrote in a recent report.

While TV viewing over the Internet will "fundamentally change the game," it will drive up the value to content owners, he wrote. Indeed, recent first-cycle syndication deals have been sold "at or near record prices," he wrote. Swinburne rates CBS Overweight with a price target of 31.

IN ADDITION TO THE CBS NETWORK, known for many years as the "Tiffany network" for the quality of its programming, CBS owns 29 broadcast stations and 130 radio stations. The local broadcasting segment was the biggest contributor to operating income in 2010, at 41%.

Cable networks, including Showtime and the Movie Channel, contributed 29%. As Redstone and Moonves noted in their annual letter to shareholders, the company's investment in original content such as Weeds and Nurse Jackie helped Showtime notch its seventh straight year of growth in subscribers, numbering nearly 20 million in 2010.

Publishing is but a small slice of CBS's operations, but Simon & Schuster ranks high in prestige. The book publisher boasted 154 titles on the New York Times bestseller list last year, 14 of them at No. 1.

As for the much-ballyhooed death of broadcast television, Moonves says that's a hackneyed story line that has failed to pan out. "Every time there is a new technology out, the word is that it's going to hurt us, and every time it is proven wrong," he says.

Broadcast television, he adds, "still is the best game in town, the only place you can reach hundreds of millions of people."